Q2 2014 Earnings Call Transcript

In addition to our quarterly results, we are also announcing an update to our capital return program today, and I'd like to share a few thoughts about our guiding principles for capital allocation and our conclusion on the changes we are making for this year.

Apple has created tremendous value for shareholders by developing great product that enrich people's lives and that will always be our top priority and driving force. We will continue to innovate by investing in research and development and capitalizing on our strength in hardware, software and services. We will keep investing in our supply chain to promote scale and efficiencies expanding our global presence by building retail stores, investing in marketing and distribution, and extending our reach into new market.

We are expanding Apple's products and services into new categories, and we are not going to under invest in this business. We're also investing through acquisition and we've acquired 24 companies in the past 18 months. To invest organically and to make acquisition strategically, we need to maintain financial flexibility. With this framework in mind, Apple's Board and management team review capital allocation regularly and we solicit input on our program from a broad base of shareholders.

We very much appreciate all of the inputs that so many of our shareholders have provided us on how best to deploy our cash. We will continue to seek investor input going forward and will update you on our conclusions around this time each year. This regular process allows us to continually evaluate return of capital in light of the most current information available, and it enables us to be thoughtful about the size, mix and taste of the program. We continue to be in the fortunate position of being able to return significant capital to shareholders. We started doing so two years ago when we announced our first program of $45 billion and we more than doubled the program last April to $100 billion. Today we're announcing that we're increasing the size of our program once again with an addition of over $30 billion for a total program size of over $130 billion. The size and pace of our program is unprecedented and we still expect to complete it by December of 2015 as we announced last year.

We think very deliberately about how much and in which way to return cash to our shareholders. We decided to continue to allocate the vast majority of the incremental capital return to share repurchases because we believe our current stock price does not reflect the full value of the Company. The size of the share back increase is a signal of the Board and the management team's strong confidence in the future of Apple. We also understand the importance of the dividend to many of our investors and we're increasing it for the second time in less than two years. We believe this is a meaningful increase for those shareholders who value income and we are planning for annual dividend increases going forward.

Now I'd like to turn the call over to Luca for the details of our quarterly results, as well as, more information about our capital return program.

Transcript Call Date 04/23/2014

Toni Sacconaghi - Sanford C. Bernstein: Any comments on the latter part of that around, sort of the imperative to continue to come out with really great products that ensure people have an incentive to upgrade, yet when we've seen you really revolutionize phones between iterations, we've seen margin pressure?

Tim Cook - CEO: The most important thing, Toni, that we do is to make great products that really get our users excited to want the next one and that will always be the case. You can bet that that's where the vast majority of all of our attention is on doing this thing. In terms of the BOM pressure of any new product, you have seen in the past that exists. I think you've also seen that we have a way of working down the cost curve. That was certainly very key and achieving the 39.3% gross margin on this quarter. And as I said before, we price things at a level that is fair for the value that we're providing, and so we're certainly not stuck on certain price points. We price that values that are fair for the value that we are delivering.

Operator: Steven Milunovich, UBS Securities.

Steven Milunovich - UBS Securities: Tim, I understand that the iPad is not as weak as it appears on a sell-through basis, but still it's relatively flat over the last year in terms of sell-through. What are your thoughts in terms of why that is and can that accelerate with Office on the iPad going forward?

Tim Cook - CEO: It's a good question. Let's talk about iPad a little more than we did in the comments. When I backup from iPad, here is what I see. It absolutely has been the fastest growing product in Apple's history, and it's been the only product that we've ever made that was instantly a hit in three of our key markets, from consumer to business including the enterprise and education. And so, if you really look at it in just four years after we launched the very first iPad, we've sold over 210 million, which is more than we or I think anyone thought was possible at that period of time. It's interesting to note that that's almost twice as many iPhones that we'd sold in a comparable period of time, and over seven times as many iPods as we'd sold in the period of time. So, I think it's important to kind of to put that in perspective. We've come a long way very, very quickly. Looking at it by market a bit, which I think is important. I think Luca mentioned a little bit of this in his comments. In the education market in the U.S., we have a 95% share. So the focus in education is on penetration, is on getting more schools to buy and my belief is the match has been lit, and it's very clear to the educators that have studied it is that student achievement is higher with iPad in the classroom than without it. So I'm confident we've got a really great start in education far beyond the U.S. now. This is happening in many, many parts of the world. In the enterprise market, we're seeing virtually all, 98% of the Fortune 500, they're using iPad. We're seeing – according to Good Technology who looks at activations of tablets – the latest data we have from them is that 91% of the activations of tablets in enterprise were iPads. So this is also an astonishing number and many of those enterprises are writing apps that are key proprietary apps for running that business, and this is great for that company because they're more productive as a result of that. So once again, just like in education in a way, what we have to do in enterprise is focus on penetration, it has to be deeper and broader. But in terms of having people begin the process, beginning writing apps, we're doing a pretty good job of that. In the retail market, if you look at the U.S. as a proxy, the NPD numbers for March just came out a few days ago and we had 46% share and embedded in that 46%, there's a lot of things in there that I personally wouldn't put in the same category as iPad, and that are weighing the share down. It's certainly a market we wouldn't play in and in a type of product you would never see an Apple brand on. So, we feel like we're doing well there. Office; I believe does help. It's very unclear to say how much. I believe if it would have been done earlier, it would have been even better for Microsoft frankly, there is a lots of alternatives out there from a productivity point of view, some of which we brought to the market, some of which many, many innovative companies have brought. But I do see that Office is still a very key franchise in the enterprise, in particular. I think having it on iPad is good, and I wholeheartedly welcome Microsoft to the App Store to sell Office. Our customers are clearly responding in a good way that it's available. So, I do think it helps us particularly in the enterprise area. The other things you look at on iPad that are just blow away its customer sat, is 98. There is almost nothing in the world with a 98% customer sat and the intention to buy numbers look good with two-thirds of the people planning to buy a tablet or planning to buy an iPad. The usage numbers are off the chart, far and exceeding Android tablets, four times the web traffic of all Android tablets combined. So, when I backup from all of these, I feel great. That doesn't mean that every quarter, every 90 days is going to be a number that everybody is thrilled with. But what it means to me is that the trend over time – over the arc of time that things look very, very good, that iPad has a great future. And of course the thing that drives us more than any of this are the art next iPads if you will, the things that are in the pipeline, the things that we can do to make the product even better, and there is no shortage of work going in on that nor any shortage of ideas. So when I backup from all of this, I can't help but still be extremely excited about where we are. I think we did a reasonable job of explaining what we think the disconnect was between what we had expected, which we hit it at the high end of our expectation and the street's view of this one. I believe the vast majority of it is that first thing was just channel inventory that maybe we should have been even clearer on last quarter to take into account. But I'm very bullish on iPad.